With increasing regulation and competition among social-service providers, there is industry speculation that Not-for-Profit (NFP) organisations will need to consolidate to ensure their financial sustainability – the catch cry “get big or get out” is growing.  There are many examples of such consolidation within social-service industries: think Telstra Health, Virgin Care and numerous NFP UK organisations (often) acquired by private corporations in the area of disability support services.

 Is it a Merger or an Acquisition?

Industry consolidation is usually either through mergers or acquisitions. A merger is the coming together of two or more organisations to form a new organisation.  An acquisition is where organisation A is absorbed into organisation B, with organisation B gaining control of A’s assets and managing A’s business.

Merger verses Acquisition: terminology affects culture

Terminology can be play a very important part for employees in setting the cultural tone and organisational morale, before, during and after the transaction. Mergers are often associated with the amalgamation of equal organisations – in theory, all parties within the merging organisations happily commit to the transaction. On the other hand, the word “acquisition” tends to have negative connotations, with the acquiring organisation possibly portrayed as mercenary, and “taking advantage” of the organisation being acquired. This is not necessarily the case – acquisitions  can be positive for all organisations involved.

Keeping the Client at the heart of any Merger or Acquisition

Imagine a small NFP that is constantly struggling to ensure financial sustainability. Perhaps it cannot attract or retain experienced staff because of lack of resources or career advancement opportunities, or is unable to adapt to changing government policy because of inexperienced leadership, lack of technology or systems, or old-model service delivery. Consider what may happen if this organisation is acquired by an large and reputable NFP with a strong social equity culture. Conceivably, both organisations may experience positive outcomes for their clients, employees, and other stakeholders as a result of the acquisition – particularly those associated with the smaller NFP.

However, if valuable and sustainable client outcomes are not at the heart of any merger or acquisition , the value of the transaction should be treated as questionable. Irrespective of the stated justification for the merger or acquisition, if the real reason is “empire building” by an individual or a small group of Board members or managers, in all likelihood there will no be a long-term value or benefits to clients and employees. This behaviour can be damaging to an organisation’s reputation and should be avoided at all costs.

Types of Mergers and Acquisitions

Mergers and acquisitions can be horizontal, vertical, market (or concentric), or conglomerate (to name a few).

An example of a horizontal merger or acquisition is where organisation X, which provides services to children with autism who live in one local government area, joins with organisation Y, who provides very similar services to very similar clients in an adjoining local government area. Horizontal mergers or acquisitions offer “economies of scale”. In this example, both organisations can combine and rationalise their systems and administration staff (such as HR and payroll systems, reception and call centre facilities, IT support, marketing and fundraising teams, research and development functions, and accounting systems) and spread a (usually) decreased cost across a greater volume of services, thus reducing the cost of each service overall.

An example of a vertical merger or acquisition is where organisation F is a plant nursery and turf farm which employs people with a disability. They join together with organisations G and H. Organisation G provides landscaping services, and also hires people with a disability as labourers, and company H is a landscape architectural planning business. In this vertical merger, all three organisations benefit:  F has an assured outlet for its nursery and turf supplies, G has an assured supply at a set cost of products needed for its landscaping business, and H uses both organisations’ expertise to make its architectural plans a reality for clients.  Again, as with the horizontal type, there is usually a rationalisation and cost-savings across the three organisations’ systems and administration.

An example of a market merger/ acquisition is where organisation S manufactures mobility and other health and disability aids, and equipment, joins with organisation T, who manufactures consumable health products, such as nursing mothers’ breast pads, incontinence pads and wound dressing supplies. Combined, S and T can offer more products to their greater but similar customer base (becoming a “one-stop shop” for those customers), learn from each other’s expertise in manufacturing, while also gaining the benefits of rationalisation and cost savings of both organisations’ systems and administration.

As the name suggests a conglomerate merger or acquisition is simply the joining together of very different organisations (in terms of product / services, technology,  and/or customer bases) to become a strong market force by sheer size and geographic reach.  While there may be no synergies of administration or systems across the organisations, size itself is seen as the market advantage.

Risks associated with Mergers and Acquisitions

The success of any organisational consolidation will depend upon the comprehensive planning and implementation frameworks the organisations put in place, but there are definite risks associated with the transaction. 

  1. If the governance body of NFPs do consider a merger or acquisition, decisions should not be made without due diligence enquiries. Cultural differences between the consolidating organisations may be so different that the advantages of the transaction’s perceived value may be outweighed by huge cultural differences, essentially preventing staff from ever working cohesively together, irrespective of how well-intentioned or well-managed the merger or acquisition. ,

 

  1. Another risk of merging or acquiring organisations is the HR costs that may be incurred through staff redundancy, and recruiting and training new staff, including new leaders, if current staff are not requested, or do not wish, to remain with the newly consolidated organisation.  While a reduction in the number of administrative staff, and possibly some other expert staff, in the new organisation may have cost benefits in the long term, be conscious of the short term HR implications. If certain staff in either organisation are essential to the success of the merger or acquisition, ensure those staff are engaged in transaction discussions early and their commitment “locked in”.

 

  1. Another issue that requires considerable thought in any merger or acquisition is the reputation and brand of each of the individual organisations, and the impact on the intangible assets for the consolidated organisation. Do not underestimate the value in existing organisation names, and brand recognition. If the decision is made to retain only one name, what message does that send to clients, staff and stakeholders of the ‘defunked’ organisation? Or do you try to create a combination name that may be too much of a mouthful to easily market? Maybe start afresh with a totally new name and logo, but lose the brand recognition the consolidating organisations have already spent considerable resources developing?

 

If your NFP is considering merging with, or acquiring another organisation, or have been approached for acquisition by a larger NFP, you should seek specialist advice from someone who has experience in this area. Contact Faileen James who has successfully guided organisations through NFP merger and acquisition transactions for a confidential discussion today.